Ordinarily resident - a taxing question

A natural person is regarded as a 'resident' of SA when such person is 'ordinarily resident' or meets the requirements of the physical presence test. The physical presence test is prescribed by the Act whereas ordinarily resident is not defined. One therefore has to look at cases such as the Cohen and Kuttel cases. In this article, Johan van der Walt alerts SA taxpayers to recent developments in the UK regard to the meaning of 'ordinarily resident'.

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Paul Simon wrote the song 'Homeward Bound' while sitting at Widnes Station in Liverpool. It was recorded in December 1965 and peaked at number five on the Billboard Hot 100.

The song described Simon's longing for his girlfriend Kathy Chitty, who lived in London – but also for home in the USA. The chorus goes:

"Homeward Bound

I wish I was

Homeward Bound

Home, where my thought's escaping

Home, where my music's playing

Home, where my love lies waiting

Silently for me"

Although Paul Simon's lyrics are far removed from the world of tax they are remarkably instructive when it comes to the meaning of 'ordinarily resident' for tax purposes.

The concept of 'ordinarily resident' is not defined in SA tax law. One therefore has to look to cases like Cohen v CIR 1946 AD 174, 13 SATC 362 and CIR v Kuttel 1992 (3) SA 242 (A), 54 SATC 298 for guidance. In the Cohen case Schreiner JA held that "... ordinary residence would be the country to which [a man] would naturally and as a matter of course return from his wanderings". In the Kuttel case Goldstone JA found that "a person is 'ordinarily resident' where he has his usual or principal residence, that is, what may be described as his real home." [The SARS approach to 'ordinarily resident' is found in Interpretation Note No 3 of 4 February 2002.]

The purpose of this article is not to revisit the residence principles found in SA precedent. It is rather to alert SA taxpayers to recent developments in the UK with regard to the meaning of 'ordinarily resident' and what it really takes to sever the ties that bind.

The recent UK Supreme Court case of R (Davies and another) v HMRC; R (Gaines-Cooper) v HMRC [2011] UKSC 47 undertook an authoritative analysis of the issue of residence in the UK for tax purposes. The question in relation to both Davies and Gaines-Cooper was whether said taxpayers had become non-resident for UK tax purposes. Davies and James (the first appellants) had moved into furnished Brussels apartments during 2001 but retained their respective homes in Swansea where they frequently visited their families, albeit for relatively short periods. There also were UK visits to oversee their joint business interests and they retained their links to Swansea Rugby Football Club. The second appellant Gaines-Cooper testified that he in 1976 (at age 39) had acquired a domicile of choice in the Seychelles from where he led 'an international existence'. Despite such international existence he spent about three or four months each year in the UK where he had successively maintained substantial homes in Berkshire and in Oxfordshire.

In respect of Davies and James the HMRC asserted that they had "... failed to establish the necessary distinct break with family and social ties in the UK." In Gaines-Cooper's case the Special Commissioners found, by looking at the overall position, that England remained the 'centre of gravity of [Gaines-Cooper's] life and interests'.

In the end all three appellants were unsuccessful before the Supreme Court in challenging HMRC's view of them being tax-resident in the UK during the relevant years of assessment. The majority judgment of the Supreme Court (leading judgment by Lord Wilson) held that "... in order to become non-resident in the UK ... the ordinary law requires the UK resident to effect a distinct break in the pattern of his life in the UK. The requirement of distinct break mandates a multifactorial inquiry." The concept 'distinct break' was explained as: "The distinct break relates to the pattern of the taxpayer's life in the UK and no doubt it encompasses a substantial loosening of social and family ties ... 'severence' of such ties is too strong a word in this context." Following the judgment of the Supreme Court it was clear that someone claiming non-resident status in the UK for tax purposes needed to prove a 'substantial loosening of social and family ties' – however, it was not required that such ties be severed completely.

The extent to which 'loosening' of social and family ties must happen to achieve non-resident status is evident from the UK case Lynette Dawn Yates v HMRC [2012] UKFTT 568 (TTC). Ms Yates was born in England in 1955. She married and lived in the UK with her husband. Because she suffered severely from Gaucher disease she moved to the southern coast of Spain in 2000. This was to benefit from the warm dry climate in that part of Spain. Her move to Spain was supported by a Professor Cox who had treated her since 1993. Having first rented a three-bedroom apartment, Ms Yates soon purchased her own apartment during 2003. It is said that "Ms Yates was able to feel at home there." Due to UK business commitments her husband was not able to join her in Spain. Ms Yates therefore made quite lengthy trips to the UK and visited regularly when her father was diagnosed with cancer. She was in the UK over Christmas for the years 2003 – 2006. Under cross-examination she said she felt it was important to be with her family at Christmas. In 2008 she returned to live permanently in the UK since she felt her relationship with her husband was suffering from their separation.

A CGT dispute arose and the question was whether Ms Yates had been 'ordinarily resident' in the UK during the relevant years? Ms Yates claimed that there was a distinct break in her pattern of life when she went to Spain in 2000.

Judge Walters QC delivered the decision of the First-Tier Tribunal. He specifically applied the 'multifactorial inquiry' laid down by Lord Wilson (see above). Judge Walters held: "The inquiry required is 'essentially one of evaluation'. It looks to what the taxpayer actually does or does not do to alter his or her life's pattern. The taxpayer's intention is relevant to the inquiry but is not determinative. What is being examined is the quality of the taxpayer's absence from the UK."

It was submitted before the First-Tier Tribunal that, since 2000, Ms Yates "home and settled life was in Spain and not in the UK." It was argued that her "... social life in the UK ceased and she continued her life in Spain as it was in the UK."

Judge Walters found the opposite: "I was not persuaded that Ms Yates had created for herself a Spanish-based social life that in any way excluded or replaced her UK-based connections. I attach importance to her repeated return trips to the UK at Christmas (in the winter months) and the evidence of her close family ties ... the evidence from the phone bills of the telephone calls she made reinforced my impression that her most substantial social ties were with English people, whether in England or in Spain". The bottom-line: "For these reasons I find that the quality of Ms Yates's absence from the UK was not such as to support the conclusion that she had made a distinct break in the pattern of her life for the purpose of relinquishing her status as UK resident and ordinarily resident."

In addition to scrutinising Ms Yates's social and family ties, the First-Tier Tribunal also considered the following factors under the 'multifactorial inquiry':

She remained on the local Kingston Hall electoral role in the UK.

Her mail came to the UK family home and was then on-sent to her in Spain.

She continued receiving an UK disability living allowance – she never informed the Department of Pensions of her move to Spain.

She used her UK dentist and came to the UK for medical treatment.

Certain personal belongings were left at the UK family home.

The capital gains were accordingly held to be taxable in the UK.

SARS's Interpretation Note No 3 does not mention the concept of 'distinct break' as applied in the UK. It does state: "The purpose, nature and intention of the taxpayer's absence must be established to determine whether a taxpayer is still ordinarily resident." Where someone is ordinarily resident is a question of fact. In answering that question SARS could well take into account the various factors considered in Ms Yates's instance.

Local high net worth individuals are sometimes advised 'to formally emigrate', both for Exchange Control and tax purposes. The aim is to achieve the expatriation of their wealth from SA and to become non-resident for SA tax purposes.

Any SA taxpayer seeking to become non-resident should take note that the paper work (such as Exchange Control form M.P. 336(b)) is quite important. Even more important is that, having become non-resident, such taxpayer should live his or her life accordingly.

To become 'non-resident' (wink wink) and to live as if nothing has changed could have significant tax risks.

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